Emerging markets pose a difficult dilemma for many investors, forcing them to weigh the potential for outsized returns against the risk of higher volatility.

But Singapore’s stock market offers investors the best of both worlds—the stability of a developed economy, coupled with returns that rival those in nearby emerging markets.

Over the past five years, the MSCI Singapore Free Index—a proxy for the country’s stock market—has appreciated by almost 25%. But the index’s beta (a measure of volatility) over this period is far lower than in Asian emerging markets.

Singapore’s proximity to Asia’s fastest-growing economies is a big part of its growth story, though the government’s efforts to transform the nation into a leading financial center shouldn’t be overlooked.

[Nor should the country’s political stability. Investors recently breathed a sigh of relief after the party that has ruled the island-state since independence in 1965 retained power in the recent election, albeit with a reduced legislative majority—Editor.]

Meanwhile, the country’s strong currency should enhance returns for US-based investors. Singapore’s dollar recently reached a record high after the central bank announced a third round of monetary tightening and raised the currency’s trading band against a basket of other currencies.

Although the Singapore Exchange has treaded water this year, the market is up 4.7% in US dollar terms.

The strength of Singapore’s currency has helped to buffer the country from rising food and energy costs, a major concern in many import-intensive economies. The island nation reported that the consumer price index rose 5% in March, which is far more manageable than the 7% inflation rate recorded at the height of the 2008 commodities bubble.

The Monetary Authority of Singapore expects inflation to moderate to roughly 3% in the final quarter of 2011, leading to an inflation rate of 3% to 4% on the year.

Although Singapore’s economy is unlikely to match last year’s 10.5% growth rate, the country’s gross domestic product should expand by about 5% in 2011.

NEXT: Drilling Down for Best Buys

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Drilling Down for Best BuysKeppel (Singapore: BN4, OTC: KPELY) is Singapore’s largest conglomerate and the world’s leading producer of oil rigs. The company also has exposure to Singapore’s robust domestic real estate industry through its subsidiary Keppel Land.

The firm’s first-quarter profits were up 8% from a year ago, fueled by the offshore and marine division, which delivered an operating margin of 20.7%.

Management expects the market for high-specification jack-up rigs to remain active, in line with the budgeted increase in exploration and production spending by major oil companies. Keppel logged more than $4 billion in new jack-up orders in the first quarter.

The company has an almost flawless record of delivering rig orders on schedule, with an average delay of 12 just days—the industry average is about 90 days. This reliability is a huge competitive advantage when bidding for contracts.

Margins could improve even further, as the company will have the luxury of being more selective on which new-build contracts it pursues. Demand for the company’s deepwater drilling rigs remains robust in international markets, while the gradual resumption of activity in the Gulf of Mexico should provide additional upside.

With oil prices expected to remain elevated over the next three years, forecasts call for Keppel to receive $19.5 billion worth of orders for new rigs.

This investment makes a sizable contribution to Singapore Telecom’s profit growth. The company also does business in Australia, Bangladesh, the Philippines and other Asia-Pacific countries.

Yielding 5.3%, Singapore Telecom’s ADR is a buy up to $30 for investors seeking growth and income. [Shares traded at $25.49 Tuesday afternoon—Editor.]

Investors looking to add broad exposure to Singapore’s growth story should consider the iShares MSCI Singapore Index ETF (EWS). Both Keppel and Singapore Telecom figure prominently in the exchange-traded fund’s portfolio, though 46% of its portfolio is allocated to the financial sector.

This weighting should pay off in 2011, as the nation’s leading financial institutions reported strong first-quarter earnings and offered bullish outlooks for the rest of the year. Industrial stocks account for about 23% of the fund’s holdings.